Test bank for the economics of money banking and financial markets 6th canadian edition by mishkin serletis

A eliminating foreign trade B well-functioning financial markets C high interest rates D stock market volatility Answer: B Diff: 1 Type: MC Skill: Recall Objective: 1.1 Recognize the imp

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Test Bank for The Economics of Money, Banking, and Financial Markets 6th Canadian edition by Frederic S Mishkin, Apostolos Serletis

Chapter 1: Why Study Money, Banking, and Financial Markets?

1.1 Why Study Financial Markets?

1) Financial markets promote economic efficiency by

Objective: 1.1 Recognize the importance of financial markets in the economy

2) Well-functioning financial markets promote

3) A key factor in producing high economic growth is

A) eliminating foreign trade

B) well-functioning financial markets

C) high interest rates

D) stock market volatility

Answer: B

Diff: 1 Type: MC

Skill: Recall

4) Markets in which funds are transferred from those who do not have a productive use

for them to those who do are called

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5) markets transfer funds from people who do not have a productive use for them

to people who do

6) Poorly performing financial markets can be the cause of

7) The bond markets are important because they are

A) easily the most widely followed financial markets in Canada

B) the markets where foreign exchange rates are determined

C) where corporations and governments borrow to finance their

8) A security is also known as

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9) A bond is

A) not as good as investment as stocks

B) pays interest sporadically

C) never pays interest

D) makes payments periodically for a specified period of

time

Answer: D

Diff: 1 Type: MC

Skill: Recall

10) The fluctuation of interest rates

A) never occurs because the central bank is involved in setting the rate

B) is due to changes in stock prices

C) cannot occur because there is only one interest rate

D) impacts all Canadians

Answer: D

Diff: 1 Type: MC

Skill: Recall

11) The cost of borrowing is commonly referred to as the

12) Compared to interest rates on long-term bonds, interest rates on three-month Treasury bills fluctuate and are on average

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13) The interest rate on long-term corporate bonds is , on average, than other

interest rates The spread between it an other rates over time

A) lower; remains constant

14) Everything else held constant, a rise in interest rates will cause spending on housing to

15) High interest rates might purchasing a house or car but at the same time high interest rates might saving

16) An increase in interest rates might saving because more can be earned in interest income

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17) Everything else held constant, an increase in interest rates on student loans A) may increase the cost of education

B) may reduce the cost of education

C) has no effect on educational costs

D) increases costs for students with no loans

A) cannot be purchased by individuals

B) is also known as a debt security

C) is a share of ownership in a corporation

D) is a claim on assets

Answer: C

Diff: 1 Type: MC

Skill: Recall

19) A share of common stock is a claim on a corporation's

20) Lower interest rates might cause a corporation to building a new plant that would provide more jobs

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21) Bonds of different maturities

A) show no common features

B) have interest rates that tend to move together

C) have interest rates that can differ substantially

A) where interest rates are determined

B) the most widely followed financial market in the Canada

C) where foreign exchange rates are determined

D) the market where most borrowers get their

B) have risen smoothly over time

C) have been extremely volatile over time

D) have declined substantially since they peaked in the mid

A) relatively stable trending upward at a steady pace

B) relatively stable trending downward at a moderate rate

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25) Changes in stock prices

A) do not affect people's wealth and their willingness to spend

B) affect firms' decisions to sell stock to finance investment spending

26) A is an example of a security, which is a claim on future income or

27) On , October 19, 1987, the market experienced its worst one-day drop in its entire history with the S&P/TSX Composite falling by 11 percent

28) Fluctuations in stock prices

A) have become less smaller since the year 2000

B) since the year 2000 are about the same as they were before the year 2000

C) have become more volatile since the year 2000

D) have been almost eliminated since the year 2000

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29) The S&P/TSX Composite reached a peak of over 14000 in 2008 and then fell by

30) Why is it important to understand the bond market?

Answer: The bond market supports economic activity by enabling the government and

corporations to borrow to undertake their projects and it is the market where interest rates are determined

Diff: 2 Type: ES

Skill: Recall

31) What is a stock? How do stocks affect the economy?

Answer: A stock represents a share of ownership of a corporation, or a claim on a firm's

earnings/assets Stocks are part of wealth, and changes in their value affect people's willingness

to spend Changes in stock prices affect a firm's ability to raise funds, and thus their

investment Diff: 2 Type: ES

Skill: Recall

8

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1.2 Why Study Financial Institutions and Banking?

1) Channelling funds from individuals with savings to those desiring funds when the saver does not purchase the borrower's security is known as

A) not possible in the modern financial environment

B) a major disruption in the financial markets

C) a feature of developing economies only

D) typically followed by an economic boom

B) have been a source of rapid financial innovation

C) are the only important financial institution in the US

C) decline in asset prices

D) high profits in the financial sector

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5) Chartered banks, trust and mortgage loan companies, and credit unions and

caisses populaires

A) no longer provide financial intermediation

B) since deregulation now provide services only to small depositors

C) accept deposits and make loans

D) create fluctuations in the stock market

A) are the smallest of the financial intermediaries

B) are the largest financial intermediaries

C) are barred from providing financial intermediation services

D) can only provide services to corporations

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9) The term "bank" generally includes all of the following institutions except

A) phishing; financial gain

B) higher interest rates; higherinflation

C) higher profits; financial disasters

D) lower interest rates; lower inflation

12) What crucial role do financial intermediaries perform in an economy?

Answer: Financial intermediaries borrow funds from people who have saved and make loans

to other individuals and businesses and thus improve the efficiency of the economy

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13) Why is the study of financial innovation important?

Answer: Financial innovation shows how creative thinking on the part of financial institutions can lead to higher profits

C) a repository of spending power

D) the unrecognized liability ofgovernments

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4) During a recession, output declines resulting in

A) lower unemployment in the economy

B) higher unemployment in the economy

C) no impact on the unemployment in the

B) the money stock

C) the rate of moneygrowth

D) recessions have been preceded by a decline in the growth rate of money

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8) A sharp increase in the growth of the money supply is likely followed by

A) a recession

B) a depression

C) an increase in the inflationrate

D) no change in the economy

A) can be explained by changes in the price level and money supply

B) cannot be explained historically

C) is unrelated to monetary variables

D) changes in government policy

11) It is true that inflation is a

A) continual increase in the money

supply

B) continuous fall in prices

C) decline in interest rates

D) continual increase in the price level

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12) Which of the following is a true statement?

A) Money or the money supply is defined as Bank of Canada notes

B) The average price of goods and services in an economy is called the aggregate price level C) The inflation rate is measured as the rate of change in the federal government budget deficit D) The aggregate price level is measured as the rate of change in the inflation rate

A) the aggregate price level has declined during this ten-year period

B) the average inflation rate for this ten-year period has been positive

C) the average rate of money growth for this ten-year period has been positive

D) the aggregate price level has risen during this ten-year period

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16) There is a association between inflation and the growth rate of money A) positive; demand

17) Evidence from Canada and other foreign countries indicates that

A) there is a strong positive association between inflation and growth rate of money supply over long periods of time

B) there is little support for the assertion that "inflation is always and everywhere a

18) Countries with low inflation rates include

A) Canada, Sweden and the United States

B) Canada, Ukraine and the United States

C) Turkey, Ukraine and Zambia

D) Turkey, Ukraine andCanada

B) rapidly growing money supplies

C) falling money supplies

D) constant money supplies

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20) In the 1970s, in Canada, interest rates trended upward During this same time period,

A) the rate of money growth declined

B) the rate of money growth increased

C) the government budget deficit (expressed as a percentage of GNP) trended downward D) inflation fell

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24) A budget occurs when government expenditures exceed tax revenues for

a particular time period

25) Budget deficits can be a concern because they might

A) ultimately lead to higher inflation

B) lead to lower interest rates

C) lead to a slower rate of moneygrowth

D) lead to higher bond prices

26) Budget deficits are important because deficits

A) cause bank failures

B) always cause interest rates tofall

C) may lead to a financial crisis

D) always cause prices to fall

27) What happens to economic growth and unemployment during a business cycle

recession? What is the relationship between the money growth rate and a business cycle recession? Answer: During a recession, output declines and unemployment increases Prior

to every recession in Canada the money growth rate has declined, however, not every decline

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28) Describe the relationship between the aggregate price level and the growth rate in money supply Can the relationship be used to explain inflation?

Answer: The price level and the money supply generally move closely together There is a positive relationship between inflation and the growth rate of the money supply Friedman says that "inflation is always and everywhere a monetary phenomenon."

Diff: 2 Type: ES

Skill: Recall

Objective: 1.3 Identify the basic links between monetary policy, the business cycle, and economic variables

1.4 Why Study International Finance?

1) Canadian companies can borrow funds

A) only in Canadian financial markets

B) only in foreign financial markets

C) in both Canadian and foreign financial markets

D) only from the Canadian government

Answer: C

Diff: 1 Type: MC

Skill: Recall

Objective: 1.4 Explain the importance of exchange rates in a global economy

2) The price of one country's currency in terms of another country's currency is called the

A) foreign exchange rate

3) The foreign exchange rate is

A) determined by the banks

B) not important to Canadian individuals

C) the relative price of two currencies

D) the ratio of the foreign aggregate price level to the domestic aggregate price level Answer: C

Diff: 1 Type: MC

Skill: Recall

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4) The market where one currency is converted into another currency is called the market

5) Everything else constant, a stronger Canadian dollar will mean that

A) vacationing in England becomes more expensive

B) vacationing in England becomes less expensive

C) French cheese becomes more expensive

D) Japanese cars become more expensive

Answer: B

Diff: 2 Type: MC

Skill: Applied

6) Which of the following is most likely to result from a stronger Canadian dollar?

A) Canadian goods exported aboard will cost less in foreign countries, and so foreigners will buy more of them

B) Canadian goods exported aboard will cost more in foreign countries and so foreigners will buy more of them

C) Canadian goods exported abroad will cost more in foreign countries, and so foreigners will buy fewer of them

D) Canadians will purchase fewer foreign goods

Answer: C

Diff: 2 Type: MC

Skill: Applied

7) Everything else held constant, a weaker Canadian dollar will likely hurt

A) textile exporters in Quebec

B) wheat farmers in Saskatchewan that sell domestically

C) automobile manufacturers in Ontario that use domestically produced inputs

D) furniture importers in British Columbia

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8) Everything else held constant, Canadians who love French wine benefit most from

A) a decrease in the dollar price of euros

B) an increase in the dollar price of euros

C) a constant dollar price for euros

D) a ban on imports from Europe

Answer: A

Diff: 2 Type: MC

Skill: Applied

9) Everything else held constant, a stronger Canadian dollar benefits and hurts

A) Canadian businesses; Canadian consumers

B) Canadian businesses; foreign businesses

C) Canadian consumers; Canadian businesses

D) foreign businesses; Canadian consumers

Answer: C

Diff: 2 Type: MC

Skill: Applied

10) From 2002 to 2011, the Canadian dollar in value

11) When in 1985 a British pound cost approximately C$1.30, a Shetland sweater that cost 100 British pounds would have cost $130 With a weaker Canadian dollar, the same Shetland sweater would have cost

A) less than $130

B) more than $130

C) $130, since the exchange rate does not affect the prices that Canadian consumers pay

for foreign goods

D) $130, since the demand for Shetland sweaters will decrease to prevent an increase in

price due to the stronger dollar

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